The post-war growth of much of the developed world has been very good for baby boomers. They were able to buy houses for $20,000 that are now worth $800,000. They had low cost education, and for a significant part of their lives, low cost healthcare. They also spent their money – living lives unimaginable to their war era parents: Cars, vacations, college educations for their children. And very often, their employers offered pensions! All was going to be fine – right?
Not so much…
The golden era of ‘live today and worry about tomorrow sometime later’ is long gone for baby boomers, and now for everyone else as well.
Now that retirement looms, many of these older workers are faced with a future with limited incomes. Some may have pensions, and retirement accounts, but many others are facing a retirement funded by social security.
The good news is that many of these people have assets to lean on. In 2013, about 65% of older homeowners had paid off their mortgages and owned their homes free and clear. The reality is that for these older homeowners they may be ‘asset rich, cash poor’.
So what to do if you, or someone you love, is asset rich and cash poor? The first thing to consider is that money is emotional. People have significant emotional investment in their assets that shouldn’t be discounted. So the idea of ‘just sell it’ isn’t generally the best first option.
The second thing to do is to do some math. And it’s pretty simple math. How much does this asset cost to keep? A piece of art, for example, the answer is next to nothing. For a house, it’s significant - taxes, maintenance, furnishing, heating and cooling.
Next, what is the sale value of the asset at this point in time – and what options in life could be afforded by selling the asset? Web sites like Zillow.com can give you a ballpark price for house values, and sites like Invaluable.com can help with art prices.
But again, humans are emotional – and sometimes the value today doesn’t matter – the owner will not sell.
So then what?
Well, the good news is that a hard asset can be borrowed against. A home equity loan could provide the capital someone needs to live on and pay the bills. They are offered at generally reasonable interest rates, with clear repayment terms. BUT, if the homeowner no longer has cash flow from a job, for example, a home equity loan isn’t going to work because they have nothing to pay it back with.
Another option that is increasing in popularity is the reverse mortgage. In a traditional mortgage you paid a bank over the course of 30 years and in the end you own your home outright. A reverse mortgage is basically the bank buying your house back from you. Every month they will send a check, and take more equity in your home. As this happens, over time you own less and less of your home.
These products are structured in such a way that you can stay in your house until either you pass away, you sell the house, or you move out for more than 12 months. The best thing about these loans is you don’t have to move if you don’t want to. You can even stay past the point where the bank owns the house outright. There is insurance on these loans that will pay for this situation. So when the house is eventually sold, any shortfall of funds, where the house is worth less than what is owed to the bank, this shortfall is covered by the insurance.
Another option is to borrow against your retirement accounts, or life insurance policies. Some 401(k)s offer this option, but you have to check with your plan provider to see if this is allowed with your specific plan. You can usually borrow against your cash value whole, universal or variable universal life insurance policies if you have one. But you need to be very careful that you have a repayment plan in place because the interest you pay can destroy any value you have in the plans. As for IRAs and term life insurance plans, you cannot borrow against them.
But the bottom line is this: Kicking a problem down the road only makes it bigger. Once an asset is gone, it’s potential for growth goes with it. And the logical next step is debt. Be very careful when you tap into your assets. You need to make sure the money will last.
With an aging population – these types of ways to get money out of assets will only increase.
The best thing to do is also the hardest: Take emotion and sentimentality out of the equation. Ask yourself what can be done to ensure that problems are not being kicked down the road, or on to the next generation. After all, as hard as change may be, it can be way worse to delay or to avoid problems until they come home to roost.
When you buy something, wouldn’t be nice to be able to sell it for at least the same price as what you bought it? Buy a pair of shoes for $100 in January and sell them in June for the same $100? Wouldn’t that be nice!
Well, things don’t really work that way. Many things that we buy in life are consumed and used and have little financial value after they are purchased. It’s something of a symptom of our modern world. Things are made to be disposed of, to wear out quickly or to become instantly obsolete.
But there are things that we own that do have financial value, that do not wear out and are built to last. These are assets.
The key to defining an asset, is figuring out whether it is worth something. The easiest way to define this is by seeing if you can sell it. If someone is willing to pay you money for an item you own, then it is an asset.
So how do you value an asset? First, it’s important to note that asset prices fluctuate. Some assets like houses tend to hold their value, subject to the ups and downs of supply and demand. Other assets like cars constantly decrease in value. And others, like art, have a value that depends on quality, demand, and rarity.
The true value of an asset is only known when it is sold. The value at that moment is the price that someone just paid for it. But if you’re not trying to sell the asset, it’s hard to know the true value of that asset. So you have to make an estimate.
The easiest way to make an estimate is by finding the price of similar items that have recently sold. These “comparables” form the basis for your estimate. And a huge industry has sprung up to keep track of comparables and help you make an estimate.
Let’s look at a few assets to see how this works. Let’s start with cars. They are terrific examples of assets. They cost a lot of money, they can last a long time and they retain enough of their value that you can sell them at a future date. Because cars are standardized by company, brand and options, you can easily find comparables. Sites like Kelley Blue Book, NADA Price Guides and the Black Book (currently used by Cars.com) have pricing engines that can price your car.
These sites dig into past transactions to come up with a ballpark of what your car is worth. But there can be a wide range of prices. So even when you have a comparable price, there is still a bit of estimation work that you will have to do.
The final value of your car is affected by three additional factors: The condition of your car, where you intend to sell it (some markets have higher prices) and who you want to sell it to (if you sell it to a dealership as a trade-in, the price will be lower than if you sell if yourself. Dealers need to make money on the trade-in after all…). So once you take these assumptions into consideration, you can adjust your estimation to get to the true value of your car.
You can do this sort of valuation exercise with almost any asset. For houses you can go to sites like Zillow and Trulia. They have algorithms that give an estimated house price. But housing is much more difficult to value. The condition of a home is impossible to evaluate using an algorithm. And homes are not commodities, so true comparables will be impossible to find. Nevertheless, sites like these can give you an estimated price of your house and are great tools to use to watch over time to see how market forces impact the price of your home. And you know your home better than anyone. You can use the estimation as a baseline and adjust your valuation based on your own knowledge of your home.
Art is another asset that can be valued with comparables. Sites like Invaluable.com have historical auction records going back decades. If you know the artist who made your piece, you can usually find auction records of her work. If you can find a piece with a similar size, composition and quality, you can get a good idea as to value.
And what about all the things that sit in your house collecting dust? You never know what they might be worth! Just go to eBay to see if someone is selling something similar. You might be surprised to find what kinds of things you can sell there.
But sometimes you need a precise valuation. Usually if you’re looking for insurance for your asset, your insurance company will not settle for an estimate you build on your own. These are times that you need to get the help of an expert. There are lots of people out there who can give you a hand. Real Estate agents and real estate appraisers have the knowledge and experience to give accurate valuations of homes. And for antiques and art, appraisers are essential if you need a documented valuation for insurance.
On a final note, when you are spending money, it is always good to spend using an asset mindset. When you do this, you start to take things like quality, durability and intrinsic value into consideration. By doing this, your decisions will start to focus on things that retain value instead of things that are cheap and disposable. Those may end up being better long-term decisions for you.